In Defence of Price Gouging

Price gouging is the practice of putting prices up after a disaster. At first this seems deeply immoral, business owners profiting at the expense of those hurt by crises, what evil capitalist ‘scum’. As always the truth is light-years away from left wing rhetoric.

First of all we need to realise that businesses work on supply and demand, when a disaster strikes demand some products rise heavily (bottled water for example) whilst supply lines are disrupted.

 

As the simple graph above shows, when supply shrinks prices rise. The same is true when demand increases. This is a simple fact of how markets work.

When regulations are put in place to stop price gouging prices are unable to move so demand outstrips supply. This leads to shortages, people unable to eat because food is sold out, or they do not have access to clean and fresh water etc.

Of course the argument goes that if prices rise only the rich will be able to eat on or drink, however imagine this scenario:

For the ease of argument lets say the shop has 10 loaves of bread, if prices were allowed to rise they would go to £4, but they are kept at £1. Let’s also assume that there are 5 people each with £8 in their pocket. With prices held low person 1 enters the shop and, wanting to buy as much bread as possible as he knows supplies will run out, spends all £8 and buys 8 loaves of bread. Person 2 enters and buys the remaining 2 loaves. Person 3 4 and 5 starve.

Now if we let prices rise to £4 person 1 buys 2 loaves, person 2 buys 2 loaves etc everybody eats.

Of course this is an incredibly simplified model but the basic principle is right, in a crisis people hoard, when prices go up they are able to buy less and even if they are ultra wealthy are disincentiviesed from buying too much due to prohibitive prices. Prices going up means that each person buys a moderate amount.

Back to when prices are held down by controls, the first few people to get to the shop stock up as much as possible, the second load get a bit and the many after get nothing. That leaves the vast majority with nothing (raised prices wouldn’t get everyone something but would leave many less with nothing than price controls) but that’s the vast majority with money and demand, a black market inevitably forms, so price gouging happens anyway. The problem of course is that the black market doesn’t happen in normal shops but street corners, out of car boots and generally in places that not everyone knows of and has access to. When price gouging happens in legal business people know where to go to get food, when it happens in the black market many people don’t.

Price gouging seems morally disgusting and feels like businesses abusing a disaster for profit. In fact it is a natural response to changing supply and demand. As David Brown points out price gouging saves lives. If you truly care about the needy, the desperate, and the worst off in any disaster letting businesses raise price, letting those who need goods the most identify themselves, and have a recognised known place to buy the in need good is essential. Holding prices low sounds popular but really all it does is favour the rich who are able to hoard, favours the minority who get to shops first over the majority who get less than they need and favours those who can find black markets over those who can’t. While raising prices wont help everyone it will lead to a better outcome for far more people, favour the poor, and minimise the impact of shortages.

The best response to a disaster is to trust the market, not to trust politicians and regulations.

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